Islamic Finance for Thailand: Opportunities and Challenges

Thailand is set to explore Islamic finance by identifying the two largest Islamic banking businesses: retail and investment.

While there is some progress to the retail banking with its first full fledged Islamic banking, the Islamic Bank of Thailand, the country is still lagging in terms of capital market operations.

However, Thailand determines to march ahead of obstacles by leveraging on its good relations with more Islamic banking prowess of its counterparts and the internal concerted efforts to accommodate Islamic finance in Thailand.

By Sathit Limpongpan

Thailand has every intention to develop an Islamic banking and finance system. This may include both a retail banking sector, designed to assist small, medium and also large business enterprises, and also an investment banking capability to institute, develop and market project finance instruments. These are notably the well-known Sukuk issues that have gained such broad acceptance around the world.

In the case of retail banking, the Islamic Bank of Thailand already has a nationwide branch network providing retail banking products and services. These include savings accounts as well as personal, trade, real estate and housing loans. All these services are based on, and are compliant with, the Shariah.

In the second case of larger scale project financing and capital market operations, Thailand still has some way to go. The organization of Sukuk issues, whether in the form of a national-level sovereign Sukuk or specific Sukuk issues for transport, energy or other infrastructure projects, requires international banking capability. This is required both for the design of the funding structure, and also for the mobilization of major international fund providers.

Thailand is fortunate to have good friends in the international banking community with the capability and interest in cooperating with it. But Thailand also has its own knowledge of Islamic finance. The Ministry of Finance has teams working on issues of Islamic finance in the Fiscal Policy Office and the Public Debt Management Office, as well as at the Islamic Bank of Thailand. The Bank of Thailand is also actively studying the regulatory aspects of Islamic finance.

Thailand’s Securities and Exchange Commission as well as the Stock Exchange of Thailand are working on the possibilities of creating secondary markets, as well as the inauguration of a Shariah Index specifying listed companies which are compliant with Islamic principles.

Hence, it is not a question of launching Islamic finance in Thailand but rather development of greater sophistication. It needs to train bankers, regulatory supervisors and, in particular, compliance and audit officials in these new skills. For this upgrading process, Thailand welcomes support from its friends around the world. They could include experts from the London market, one of the most sophisticated in the world. They also include those from Malaysia, which has achieved so much to create, in a relatively short time, one of the leading systems of Islamic banking and finance in the world. Thai and Malaysian parties, rather than competing can work together to build a stronger base for Islamic finance throughout the ASEAN (Association of Southeast Asian Nations) region.

Malaysia has already gone far, setting up specialized Islamic banking and other financial institutions. It has developed a fully operational capital market, making extensive use of Sukuk issues for the financing of transport, energy and other infrastructure projects. With Thailand also implementing extensive infrastructure development projects, it could certainly benefit from similar initiatives.

The scope and scale of Islamic finance in the world today is truly enormous and rapidly expanding. At the present rate of growth, the global market for Islamic fi nance services could soon reach US$1 trillion. But even that may be nowhere near full potential as Standard and Poors has estimated that the potential supply and demand for Islamic finance could readily reach US$4 trillion. However, this estimate was made before the massive oil price escalation in recent times. This has hugely expanded the resource base of oil producing countries, many of which are in the Middle East. Although development is proceeding rapidly in those countries, their relatively small populations and territory size mean enormous fund surpluses are seeking solid and secure outlets with good returns. Increasingly these funds require a Shariah compliant basis for lending.

Nevertheless, there are many challenges facing Thailand, and indeed any country, in gaining access to this massive funding base. Five are particularly important:

The legal and regulatory framework.

Financial reporting and accounting systems.

Shariah compliance.

Availability of education and skills.

Development of secondary markets.

On the legal and regulatory framework, Thailand recognizes that it is necessary to adapt tax, mortgage and financial institution regulations to accommodate Islamic finance. Thanks to the initiatives of the then Chancellor of the Exchequer Gordon Brown, Britain was able to resolve these issues. As a result, an active, even world leading, Islamic finance market was developed. Malaysia and now Indonesia have within ASEAN also achieved impressive results. Thailand has to study their experiences, both from an institutional viewpoint as well as in terms of tax, mortgage and other specific transaction issues.

In terms of financial reporting and accounting, there is also a need for international standardization similar to the International Financial Reporting Standards (IFRS) which also forms the basis for the Thailand Accounting Standards (TAS). Progress has been made under the guidance of the Accounting and Auditing Organization for Islamic Finance Institutions (AAOIFI), but Thailand will need further cooperation with this and other institutions in order to achieve high standards of operation.

Shariah compliance is a difficult and complicated issue. There needs to be harmonization of legal opinions regarding the validity of products, operations and systems. This will ensure that all Islamic financing products, general and specific, will gain acceptance universally. Otherwise, a product which is judged Shariah compliant in one market will not gain acceptance in another market. As Islamic finance develops, no doubt experts in Islamic principles, laws and finance will reach consensus. But we have not arrived at that point yet.

Regarding skill shortages, Thailand recognizes its particular need for development. The country’s higher education system does not yet provide adequate opportunities to acquire such skills. However, neighboring Malaysia has developed an extensive skills base, with an expanding range of educational institutions and a widening resource of expertise. Cooperation between Malaysia and Thailand has already commenced and will undoubtedly expand in the future. Islamic finance also needs specialized accounting and information technology services. These should not be neglected in the educational process.

Finally, the importance of the development of secondary markets for Islamic finance products must not be overlooked. This is where the Securities and Exchange Commission and Stock Exchange of Thailand will need to develop expertise, including study of the experiences of more developed markets. The main markets for Sukuk, which are usually denominated in US Dollar, are international.

However, it will also be important for Thailand to develop Shariah indices comprising locally listed stocks and bonds. These may thereby attract equity capital from Middle East capital markets.

The Second Thailand Islamic Finance Conference held on the 26th June, following from the fi rst event in September 2007, marked a second important step in bringing together interested parties from Thailand’s public and private sectors both inside and outside Thailand. The conference enabled them to gain and share knowledge about the Islamic finance sector as well as witness the ever-increasing level of interest in the subject in Thailand.

There is still a long way to go but Thailand has clear directions along the path as well as strong and knowledgeable guides for the journey. Thailand is still at an early stage but it can benefit from the experience, and indeed, any shortcomings, of those who have traveled the path ahead of it.